When we hear the word Debt, we hardly think of it as a good thing. Mainly, because it isn’t.
As you are learning to control your finances, it is essential to understand how expenses can become bad debts and hurt your budget. If the debt can’t be paid off easily within the monthly budget, it is usually considered bad debt.
There are situations where debt is reasonable, as well. It is hard to save up enough to buy a car, so that a loan may be useful. The situation here is to make sure that the loan amount can be comfortably paid off within the monthly budget.
Is there such a thing as Good Debt?
Yes, there is. We explain them to you below:
Good Debt exists when items are very expensive to acquire, and you need a plan to achieve them. That’s what we called Good Planned Debt. The usual method of getting some of these things is to save up some of the value, then get a loan for the remaining expense.
A few samples are a mortgage, further education and an affordable vehicle.
Good planned debt means that it is a good purchase because of the value it represents to the family and because it has been properly planned for and can be paid off within the family budget.
The average results of Good Debts are:
- Wind up with a home of your own that you can say is your own, and the paid off value is yours.
- Have a car to use when you need it.
- Have memories of a trip.
- Get an education that improves your working career and increases your income.
What about Bad Debt?
Whenever you lose control of your expenses, bad debt happens.
Bad Unplanned Debt: bad debt can be buying something you can’t afford, and it puts extra pressure on the budget. An example is buying a vehicle and getting several bells and whistles that you can’t afford. Another example is buying an expensive item on your credit card. You can’t make the payments to cover it, thus incurring more interest and penalties plus stress on the family. When you can’t pay the rent or the phone bill because of overspending or bills piling up, that is bad debt.
It means that expenses just keep adding up and the expenses can’t be paid because there aren’t any funds left in the budget. It can get to be a big spiral downward into debt.
The average results of Bad Debts are
- Paying interest and penalties
- Getting deeper into debt
- Stress and anger within the family
While there are only two items on the Bad Debt list, they pose a great risk to the family’s life.
In summary, keep an eye on your expenses and don’t go overboard with your credit cards. Think first, and don’t act on impulses. It will save you a lot of trouble and sleepless nights. Your quality of life is your main goal when we talk about finances.